multinational finance

Topics: Futures contract, Derivatives, Derivative Pages: 25 (4726 words) Published: October 8, 2014
Q2. What type of derivatives on foreign currency exchange exists in Malaysia, what is the state of the derivatives market here and how are they regulated? The Malaysian Derivatives Exchange (MDEX) makes available a number of derivative instruments - Kuala Lumpur Composite Index Futures (KLCIF), Index Options, Crude Palm Oil Futures and KLIBOR (interest rate) Futures – but not Ringgit futures or options. Even in other countries where such derivative markets exist however, not all derivatives on all currencies are traded (Kameel, A., 2008). While the existences of these markets do assist in risk management, speculation and arbitrage also thrive in them, both in the spot and derivative markets. Types of derivative instruments traded in Malaysia and their specifications. a) Foreign Exchange Hedging with Forwards

Foreign exchange forward rate is an agreement between two parties (OTC derivatives) to fix the exchange rate for a future transaction. In Malaysia, there are some banks do provide Forward Rate Agreements (FRA) service such as Bank Islam Malaysia, Maybank, EON Bank Group, CIMB Bank Group, HSBC Bank Malaysia, etc. A company simply transfer the risk to the bank when they entering into a FRA with a bank. Definitely, the bank internally will do some kind of arrangement to manage the risk. (Kameel, A., 2008) Specification of Forward Contract: (Contract that allows the secondary trading of forward contracts, in which the financial settlement amount is calculated by converting the value of the index points into local currency). Underlying Instrument

Stocks authorized by Bursa Malaysia Derivatives Berhad
Contract Size
The round lot in force for the underlying share on the cash market. Trading Day
Trading Hour
9.00am -12.30pm; 2.30pm -7.00pm
Contract Months
Spot, next 3 calendar months & falling within a 12 month period beginning with spot months. Final Trading Day
Freely chosen by investors, subject to a minimum period of 16 days and a maximum of 99 calendar days for each contract. Final Settlement
The premium or the discount resulting from the transaction is financially settled on the third business day following the operation. Each point is equal to the forward price in Bursa Malaysia, adjusted by the index agreed upon between the parties. Brokerages Charged

The brokerage/deposit made by the seller of the operation’s total underlying shares. Initial Margin
BMDB assesses on a daily basis the adequacy of each investor’s guarantees to his/her risk exposure on the BMDB markets, and projects the settlement value of each investor’s portfolio by calculating the total margin required using two components: Premium Margin (difference between the closing price of the underlying asset related to the contract and the effective price of the investor’s contract) and Risk Margin (value which corresponds to the potential loss on the investor’s contract in the case of an adverse change in market prices). Possible Outcomes of Hedging using Forwards

Assuming that a Malaysian construction company, Benalec Holdings Berhad won a contract to build a bridge road in India; the contract is signed for 10,000,000 Rupees and would be paid for after the completion of the work. This amount is consistent with Benalec Holdings minimum revenue of RM1, 000, 000 at the exchange rate of RM0.10 per Rupee.

Rupee Depreciates to RM0.05
Rupee Appreciates to RM 0.15
Position Benalec Holdings Berhad took

Profit or loss
If the exchange rate changes from RM0.10/Rupee to RM0.05/Rupee, Benalec Holdings could take short position by selling the price to protect itself into further losses. If the exchange rate changes from RM0.10/ Rupee to RM 0.15/Rupee, Benalec Holdings could take long position by locking the price at the forward’s maturity date. b) Foreign Exchange Hedging with Futures

In Malaysia, for futures hedging, the trader needs to buy futures contract if the trader expect there will be appreciation of the currency value,...
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